What Are the Advantages & Disadvantages of a Pay-for-Performance Policy?

By
Rose Johnson

Pay-for-performance plans work better in some industries than in others.

Pay-for-performance plans reward employees based on their productivity. Many companies partially or fully tie employee wages to their performance. Implementing pay-for-performance policies in business offers advantages and disadvantages to companies and employees. Management and workers should understand the pros and cons of pay-for-performance plans to decide if the pay structure is right for them.

Less Supervision

Companies operating with a pay-for-performance policy experience a decrease in the need for employee supervision. Employees show initiative because they know their work output is directly linked to their pay. Companies can function with fewer supervisors, which saves them money in overhead cost. Some businesses find pay-for-performance plans advantageous because the policies usually result in an increase in productivity, which helps them increase profits

Increase in Earnings

Pay-for-performance plans allow employees to increase their earnings because they are in control of their wages. For example, if an employer pays employees commission-only salaries, an employee's earnings are solely dependent upon his success. During certain times of the year, such as holiday seasons, employees can increase production in an effort to earn extra money. Not only does an increase in earnings benefit the employee but also the employer because of an increase in productivity.

Increase in Retention

Another advantage of pay-for-performance policies is an increase in employee retention. Employees who possess the ability to earn bonuses based on performances usually have high morale because they feel as though the company is rewarding their efforts. An employee is not likely to leave a job where he earns extra income.

Contention among Employees

A disadvantage of pay-for-performance policies is that they can create contention among employees. A worker sometimes feels as though a manager shows favoritism to certain employees to help them achieve bonuses and higher salaries. Employees who are not earning bonuses can show jealousy toward those who are earning performance bonuses. Jealousy and contention create hostile work environments, which can reduce productivity.

Less Employee Input

Another disadvantage of pay-for-performance policies is that they can cause employees to fear giving managers their input for changes. Employees hold back their input even if their ideas are good because they are concerned about a reduction in earnings. Many companies value and depend on the input of their employees to make decisions regarding the company.

Resistance to Changes

Another disadvantage of pay-for-performance plans is that employees are often resistant to company changes. Workers fear changes in operating procedures will cause a decrease in productivity. Companies that make changes despite employee resistance often experience a decrease in production because of a lack of motivation from some employees. Managers can reduce employees' resistance to changes by providing adequate training and explaining the benefits of the changes.